Can social spending also make fiscal sense?

The introduction of Karnataka’s five guarantee schemes has placed the state at the centre of a national debate on the trade-offs between welfare expansion and fiscal sustainability. Launched with the objective of addressing poverty, gender inequality, and livelihood insecurity, these schemes have achieved rapid scale and visibility. However, the Comptroller and Auditor General (CAG) has cautioned that their financing structure poses significant risks to the state’s fiscal stability, particularly through rising borrowing and reduced capital formation. This raises the critical policy question: can Karnataka defend its guarantee model as a socially productive investment, while ensuring that its long-run growth trajectory remains intact?

In the financial year 2023-24, the guarantee schemes accounted for nearly 15% of the state’s total revenue expenditure, amounting to approximately Rs 36,538 crore. To sustain this outlay, the state borrowed about Rs 63,000 crore, which widened the fiscal deficit and forced reductions in capital expenditure. Reports indicate that capital spending declined by roughly Rs 5,229 crore in that year, leaving over 3,140 projects incomplete compared to 1,864 in the previous year. This crowding-out effect corroborates the CAG’s concern that continued expansion of such commitments could compromise the state’s capacity to invest in infrastructure, which is crucial for long-term productivity growth. Indeed, the 2024-25 Budget projected capital expenditure at Rs 54,374 crore, an increase of nearly 20% over the revised estimate of 2023-24 (Rs 45,429 crore). This sharp rise after the previous year’s contraction signals a deliberate attempt by the government to restore balance, protecting growth-oriented spending even while sustaining welfare commitments.

Yet, the fiscal strain tells only one side of the story. The guarantees have also produced measurable improvements in social indicators, particularly in relation to gender empowerment, mobility, and consumption security. The Shakti scheme, which provides free bus travel for women, recorded more than one billion trips within its first six months. Women saved between Rs 700 and Rs 1,300 per month on commuting, with these savings often redirected towards food, education, and healthcare. This reduction in mobility costs is consistent with global empirical findings that lower transport barriers enhance women’s labour market participation and overall household welfare.

Similarly, the Gruha Jyothi scheme, offering free electricity up to 200 units, currently covers more than 1.6 crore households. This has eased financial stress, while improving conditions for education and health within homes. Anna Bhagya, through free grain distribution and cash transfers, has supported food security for over one crore families. Gruha Lakshmi, perhaps the most ambitious scheme, provides Rs 2,000 per month to women heads of households, with allocations exceeding Rs 28,000 crore in 2024-25. Although long-term effects on poverty dynamics are still under study, evidence from comparable contexts indicates that such predictable cash flows enhance women’s bargaining power, stabilise consumption, and strengthen child nutrition outcomes.

The Government of Karnataka has claimed that 1.2 crore families have been lifted out of poverty and that up to five crore individuals may transition into middle-class status due to these interventions. While such assertions require independent verification, they signal the redistributive ambition underpinning the guarantees. Moreover, the state’s Economic Survey (2024-25) indicates that developmental expenditure has continued despite fiscal strain, suggesting that welfare expansion and growth-oriented investment need not always be mutually exclusive.

Refining the growth model

Reconciling the apparent contradiction between fiscal stress and social progress requires re-conceptualising these schemes as social investments rather than mere subsidies. By reducing vulnerabilities, expanding women’s agency, and improving basic consumption security, the guarantees generate externalities that may enhance productivity and broaden the state’s tax base in the long run. However, the extent to which these benefits materialise depends on rigorous monitoring and whether the schemes are structured to minimise inefficiencies and leakages.

A feasible pathway forward lies in balancing inclusivity with fiscal prudence. Improved targeting could reduce the fiscal cost without diluting social impact, for instance, refining eligibility under Shakti or Gruha Jyothi based on income thresholds. Digital beneficiary databases and Aadhaar-linked transfers already provide Karnataka with the tools for such rationalisation. In addition, guarantees should be linked to future revenue buoyancy: if expanded consumption and participation raise GST and state tax collections, a portion of these gains can be earmarked to sustain the programmes. This would allow the schemes to become, at least partially, self-financing.

At the same time, Karnataka must strengthen its revenue base by improving property tax collection, rationalising non-merit subsidies, and enhancing mining royalty administration. Expanding fiscal space through such measures can offset the revenue foregone in welfare commitments. Equally important is the preservation of capital expenditure. Public-private partnerships in infrastructure can free resources that would otherwise be crowded out, ensuring that welfare and growth-enhancing investment proceed in tandem. Finally, periodic independent evaluations of outcomes are essential. Schemes that display weaker multipliers in reducing poverty or enhancing empowerment should be redesigned or merged to maximise efficiency.

The CAG’s caution about fiscal risks is well-founded and cannot be ignored. Yet, the guarantee schemes have undeniably advanced critical social objectives in Karnataka, particularly for women and vulnerable households. Their long-term justification will depend on whether they are managed as productive social investments, embedded within a framework of fiscal discipline and outcome-based evaluation. Karnataka’s challenge is not to roll back guarantees, but to refine them so that they reinforce rather than undermine its growth trajectory. The durability of this model will rest on the state’s ability to demonstrate that inclusive welfare and fiscal responsibility can co-exist as twin pillars of development.

(The writer is an associate professor, Department of Economics, Christ Deemed to be University)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.